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Physician Investing Basics
[By Julia O’Neal MA, CPA]
When companies first go public they issue stock in an initial public offering (IPO). Most of the time these stocks are sold in large blocks to institutional investors and it is only after they begin trading on the exchanges that individuals, like physicians, can buy them. Sometimes these issues are very desirable—they may rise significantly even on the day of issuance.
However, over the longer term the excitement tends to dissipate, and it is much easier to evaluate a company once it has settled into a “trading range.”
Outstanding Stock
Once stock is sold to the public it is called outstanding.
Primary Offerings
A company’s corporate charter usually has authorized more stock for future issuance. When this stock is issued it is called a primary offering (as distinguished from the IPO).
Secondary Offerings
A secondary offering is the re-issue to the public of a large block of shares that has been previously held by a large investor. A primary offering is issued by the company itself and a secondary offering is handled for an outside investor by investment bankers.
Rights Offerings
More shares of stock in a company with the same assets dilute the value of the currently outstanding shares. When more stock is offered to the public, existing common shareholders have a right to buy enough shares to maintain their proportionate share in the company—they are offered the opportunity in a “rights offering,” and usually the shares to be purchased with preemptive rights are offered at a subscription price below current market price.
Rights, like warrants, allow an investor to buy a certain number of shares or portions of shares at a certain price and may be traded. Unlike warrants, rights expire after a certain period of time. When offered rights, an investor should examine the offering prospectus to determine what the newly raised capital will be used for.
Stock Buy-Backs and Treasury Stocks
Outstanding shares are attributed their pro rata portion of earnings. When companies buy back their own stock in a “stock buyback,” it is called “treasury stock” and does not participate in earnings or dividends. This action reduces the number of shares and makes existing shares more valuable while allowing them to receive a larger portion of earnings.
It is positive for a company to buy back stock and negative for it to issue more stock—more outstanding stock is dilutive to earnings and to the value of existing stock. It is also positive when management of a company (“insiders”) buys stock—it usually means that those closest to the company believe it is undervalued.
Warrants
Warrants are attached to bonds in order to allow the bond issuer to make the securities attractive with a lower-than-market coupon. Warrants also have a subscription price that is usually lower than the market price of the stock, so once they are separated from the bonds they have an intrinsic value. Warrants may remain effective for several years or in perpetuity. Dividends are not paid on warrants.
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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:
- PRACTICES: www.BusinessofMedicalPractice.com
- HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
- CLINICS: http://www.crcpress.com/product/isbn/9781439879900
- ADVISORS: www.CertifiedMedicalPlanner.org
- FINANCE: Financial Planning for Physicians and Advisors
- INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
- Dictionary of Health Economics and Finance
- Dictionary of Health Information Technology and Security
- Dictionary of Health Insurance and Managed Care
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